HQ 545150: AFR Protest No. 3401-92-100040; royalty payments; machineamortization charges; beverage wraps; 19 U.S.C. 1401a(b)(1)(D)

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 545150

                        February 24, 1994



VAL CO:R:C:V 545150 CRS

CATEGORY:  Valuation

District Director
U.S. Customs Service
P.O. Box 610
Pembina, ND 58271

RE:  AFR Protest No. 3401-92-100040; royalty payments; machine
amortization charges; beverage wraps; 19 U.S.C.   1401a(b)(1)(D)

Dear Sir:

     This is in response to an application for further review of
Protest No. 3401-92-100040, filed September 24, 1992, by Norman
G. Jensen, Inc., on behalf of protestant Somerville Packaging, of
Winnipeg, Manitoba.  The protest concerns thirty-one entries of
imported beverage wrap material filed between October 1991 and
May 1992.

FACTS:

     Protestant manufactures wrapping material used in packaging
mineral water and other bottled beverages.  The imported wrapping
material is sold to bottling companies in the United States which
apply the wrap to groups of bottles by means of a patented
process that encloses the bottles in a finished beverage
container.

     The instant protest concerns a "machine amortization charge"
of $***** that is reflected on the invoices of the imported
wrapping material.  You maintain this charge is a royalty related
to the imported wrapping material which the buyer is required to
pay as a condition of sale of the packaging material.  In your
view the amortization charge should be, and indeed was, included
in the appraised value of the thirty-one protested entries of
imported beverage wraps.

     The buyers of the imported wrap use this material in the
U.S. to package beverage bottles for sale to their customers. 
Certain specialized machinery (the "equipment") is used to
combine the imported merchandise, i.e., the wrapping material,
with beverages such as bottled mineral water.  The equipment is
used only to package products for protestant's customers, and is
not used to make the wrap itself.  In its letters of March 12,
1992, and September 18, 1992, protestant notes that the equipment
used in the wrapping process (Jak-et-Pak 150 machines, and in
some cases, a Dacam diverger) was manufactured in the U.S.  This
equipment is owned by the protestant but is leased to and located
on the premises of the bottlers.  A copy of protestant's standard
lease agreement (the "equipment lease") is attached to the file.

     Protestant purchased the equipment from an unrelated third
party, Federal Paper Board Company, Inc., in 1981.  A copy of the
contract is attached to the file.  Under the terms of the
contract, protestant agreed to pay Federal Paper Board two
percent of the net selling price (the "royalty") of Jak-et-Pak
blanks (wrapping material) used with the Jak-et-Pak equipment. 
Federal Paper Board subsequently sold its contract rights to
Riverwood International.  Accordingly, this royalty is now
payable to Riverwood and, according to the protestant, is
included in the price of the imported wrapping material.

     In contrast, protestant maintains that the machine
amortization charge reflected on the invoices submitted with the
imported merchandise represents a payment for the leased
equipment and is separate from the royalty charges assessed on
the sale of the imported merchandise, i.e., the wrapping
material.  In this respect protestant contends the amortization
charge is simply a method of financing the lease.  While the
lease calls for an annual payment of $****** over a three year
period, this payment is amortized through a charge of $***** per
thousand cartons wrapped.  Nevertheless, pursuant to article 8 of
the lease agreement should protestant's customers, i.e., the
lessees, find another source of beverage wrap material the lease
provides that the amortization charges would cease since, in this
event, no wraps would be sold.  However, customers would still be
obligated to make their payments under the equipment lease.  In
such an event, protestant would issue a separate invoice for
amounts due under the lease.

ISSUE:

     The issue presented is whether the instant machine
amortization charge is included in the appraised value of the
imported merchandise.

LAW AND ANALYSIS:

     Merchandise imported into the United States is appraised in
accordance with section 402 of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 (TAA; 19 U.S.C.   1401a). 
The preferred method of appraisement under the TAA is transaction
value, defined as "the price actually paid or payable for the
merchandise when sold for exportation to the United States."  19
U.S.C.   1401a(b)(1).

     Under transaction value there are five enumerated additions
to the price actually paid or payable, including the amount of
"any royalty or license fee related to the imported merchandise
that the buyer is required to pay, directly or indirectly, as a
condition of sale of the imported merchandise for exportation to
the United States."  19 U.S.C.   1401a(b)(1)(D).  You state that
the machine amortization charge is a royalty payment related to
the imported merchandise which the buyer is required to pay as a
condition of sale of the imported merchandise and that this
amount should therefore be added to the price actually paid or
payable for the imported wrapping material.

     Royalty payments are added to the price actually paid or
payable for imported merchandise only to the extent that such
amounts are not otherwise included in the price.  19 U.S.C.  
1401a(b)(1).  In this instance there is indeed a royalty payable
by the buyer and due on the sale of packaging material. 
Protestant acknowledges these royalty payments but notes that
they are included in the price of the imported wrapping material;
consequently, there is no addition to be made to the price
actually paid or payable.  These payments have already been
included in the price actually paid or payable for the imported
beverage wraps.

     However, there remains the question of the "royalty"
payments due under the equipment lease.  Protestant has presented
evidence in the form of a representative equipment lease that the
machine amortization charge at issue is not a royalty payment
related to imported merchandise.  The terms of the lease indicate
that this instrument pertains to equipment manufactured and
located in the United States, rather than to the imported
wrapping material.  Article 2 of the lease provides for a fixed
annual lease payment which is to be financed through a per carton
amortization charge, viz., the machine amortization charge that
is the subject of the instant protest.  Accordingly, the charge
is not related to the imported merchandise, and should not be
added to the price actually paid or payable for the imported
merchandise.

     In addition, just as the amounts due under the equipment
lease are not an addition to the price actually paid or payable,
neither are they part of the price actually paid or payable for
the imported beverage wraps.  The term "price actually paid or
payable" is defined as "the total payment (whether direct or
indirect...) made, or to be made, for imported merchandise by the
buyer, to or for the benefit of, the seller."  19 U.S.C.  
1401a(b)(4)(A).  The machine amortization charge at issue was not
made for the imported merchandise but rather for equipment rental
under the lease agreement.  Furthermore, the payments are not "to
or for the benefit of the seller," i.e., the protestant, but are
owed to the company holding the rights to the Jak-et-Pak
machines.  While the payments are made through the protestant,
the fact nevertheless remains that the lease is separate from the
imported merchandise.

HOLDING:

     The machine amortization charge is not part of transaction
value of the imported beverage wraps and therefore should not be
added to the price actually paid or payable.

     You are instructed to grant the protest in full.  A copy of
this decision should be attached to the Form 19 Notice of Action. 
In accordance with section 3A(11)(b) of Customs Directive 099
3550-065, dated August 4, 1993, this decision should be mailed by
your office to the protestant no later than sixty days from the
date of this letter.  Any reliquidation of the entry in
accordance with the decision must be accomplished prior to the
mailing of the decision.  Sixty days from the date of the
decision the Office of Regulations and Rulings will take steps to
make the decision available to Customs personnel via the Customs
Rulings Module in ACS, and the public via the Diskette
Subscription Service, Lexis, the Freedom of Information Act and
other public access channels.

                         Sincerely,





                         John Durant, Director